Divorce and Business Valuation

Understanding the different aspects of divorce and business valuation is essential if either spouse owns a company or small business. Below are some practical suggestions to keep in mind if you are facing this situation.

Maggie's Question: My husband is starting 2 new businesses in another state. My attorney advised me not to file for divorce until he is making closer to his previous income for alimony and child support. How can I find out how much money the business brings in?

Timothy's Answer: There are several ways in which to learn what someone's income is. One way is to simply ask. You would be surprised how successful this method can be. However, I understand this might not be an option for you and you may not feel comfortable you will get a true answer.

An alternative way is to file for a divorce and then get your lawyer to subpoena your husband's business records. These financial documents contain an abundance of information and a skilled financial professional can assist you in examining these documents to establish what his income actually is. If you go this route, make sure you get a good CPA who is also an ABV - Accredited Business Valuator. CPAs with this designation have the skills, training, and experience needed to meet the stringent requirements of the ABV credential. You will want to have this person as he/she are experts in their profession.

It can be difficult to determine the income of a self-employed individual especially when the business in question is new. In a new business, startup costs often exceed any revenue and there may not be much left in the end. Additionally, the business will often pay many of its expenses and therefore even in a business with revenue, it may still show little income. While your husband's expenses paid by the business are not a direct form of compensation, it can be very beneficial to him. These are often referred to as 'perquisites' and are often viewed as compensation when determining income.

If the business is not brand new, there should be a personal or business tax return depending on how the business is structured. If so, getting a hold of the actual return filed with the IRS is a good place to start. In order to get a copy of the return, you can use IRS form 4506 to request the original copy of the return filed with the IRS. This way, you know what you are getting is indeed the real thing and not a "second set of books." On the other hand, if the business is new, this may not be an option. Whatever the case may be, please understand starting and running a profitable business is very challenging and often, it takes time for a business to develop.

Sometimes in divorce people get so caught up in both the emotional and financial issues of their lives, they overlook some very obvious things. In the case of your husband, having and running a successful and profitable business is in both of your best interests. Any intentional or accidental interference with the business or its ability to grow will only reduce your opportunity to benefit from its financial gain.

In closing, there are a number of things to consider when making the decision to file for a divorce and finances are a major concern. However, the decision to wait for your husband to make as much money as he once did in his prior career may be very disappointing, as that day may never come. While I can appreciate your attorney's advice, it may not be in yours or your family's best emotional interests.

As far as the future in concerned, support, both in the form of alimony and child support is modifiable. One suggestion would be to work with your attorney or mediator to help you reach an agreement that allows for the two of you to exchange tax returns every other year to learn if there is a "material change of circumstances." This way if you husband is indeed earning a far greater income than when he first started, your support could be revised to reflect this adjustment.

Properly done, your attorney could help you reach an agreement that defines what this may look like. This will help the two of you avoid having to bring each other to court in the future to argue this point which can be both stressful and expensive. While there is no "right" answer to your question, an option such as this would not only benefit you by allowing you to move forward with your divorce, but it may also reduce some stress in both of your lives. You can move on and your husband can focus his energies on running his new businesses and making them profitable.